5 W's of Economic Policy

"Everybody talks about the weather, but nobody does anything about it." -- Mark Twain

"Failure is not an option." --  Gene Kranz , Mission Control flight director for Apollo 13

   The difference between weather talk and economic talk is that something can be done about the economy. The real issue is not whether something can be done, but how, when and by whom.
   In journalism, the 5 W's are Who, What, Where, When, and Why, plus How. This same formula can be applied to economics, and how to help an economy recover from a downturn.
   To start with, the What and the Where are clear: The What is the economy and the Where is the nation. The others then become Who should intervene, When, Why (or Whether) and How.
   Adherents to conservative, free-market economic theory insist that the main point is Whether, or Why, and their answer is No. This theory maintains that, left alone, an economy will recover on its own, so there is no reason why government should interfere with free-market forces. This makes the entire discussion moot. No one should intervene, since the economy eventually will recover and bring itself back to health.
   But the question of When remains. How long can a nation and its people wait for free-market forces to act?

   Reality check: We can't wait. Something must be done, and soon. And that answers the question of When. So that takes care of three of the 5 W's -- What, Where and When. That is, the economy, in the nation, now.

   Let's deal with Why and Whether, because they are closely related, and both get a similar answer. Some intervention is essential, especially for an economy in severely ill health. Doing nothing is not an option. Failure to act only leads to a further, faster downward spiral, and more people suffer needlessly. We are left, then, with only the Who and the How.

   Clearly, consumers and the business sector are victims in an economic downturn, so that leaves government as an entity that can influence economic conditions.
   However, this introduces another W: Which branch of government, and How it will induce economic recovery.
   There are two ways government can do this: through fiscal policy and through monetary policy. In the U.S., each is controlled by a separate entity in government. Fiscal policy is set by Congress and the Executive branches of government, and equates with how money is spent. Monetary policy influences how much money is available to be spent, and that is set by the Federal Reserve, an independent entity in government. Control of the money supply, which is one of the Fed's main activities, affects inflation and interest rates.

   When money is plentiful, government can borrow at low interest rates, and invest that money in projects that put people to work, so they have wages to spend on food, clothing, shelter and other stuff, and as they increase their spending, production rises and the economy recovers.
   Similarly, businesses also can borrow at low rates to invest in expansion or increased capacity so they will have a supply of goods to meet demand from consumers who have returned to work and increased their spending.

   The kicker, however, is inflation. When the money supply is too high, prices rise and people cannot afford to buy. When it's too low, interest rates rise, and home buyers and firms cannot afford to borrow for purchases.
   Some inflation may be helpful, since it persuades people to act soon before prices and interest rates rise further.
   All in all, however, monetary policy -- controlling the money supply and thus controlling inflation and interest rates -- is a very tricky business. It can't be too much or too little; it must be just right.
   Either way, failure to act is not an option.